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Model X and Business Tax deduction

YauKwan

Member
Nov 14, 2016
314
254
New Jersey
So, i've think i understand the depreciating portion of purchasing a model X for business use.

Can someone explain the recapture portion if i were to sell the X at some point before 6 years?
 

cpa

Active Member
May 17, 2014
3,107
3,982
Central Valley
Code section 1245 (or thereabouts) deals with recapture.

Any business asset on which depreciation is taken (allowed or allowable!) must recapture depreciation of any sort upon sale of the asset. See form 4797.
 

MelaniainLA

Member
Dec 22, 2016
886
1,226
Los Angeles, CA
Code section 1245 (or thereabouts) deals with recapture.

Any business asset on which depreciation is taken (allowed or allowable!) must recapture depreciation of any sort upon sale of the asset. See form 4797.

THANKS! What happens if you car gets totaled or bought back because of lemon law? recapture applies or are there exceptions?
 

cpa

Active Member
May 17, 2014
3,107
3,982
Central Valley
A totaled vehicle would be considered a business casualty loss and the insurance proceeds would be deemed the sales price. It makes no difference whether you purchased the vehicle or financed it and the insurance proceeds were sent to the legal owner. And, remember it is depreciation allowed (i.e., actually deducted from your tax return) or allowable (i.e., you did not take a depreciation deduction but could have). So, you could easily have some recapture in this situation. Or you might have a 1231 loss if the adjusted basis > the insurance proceeds.

I have not had any personal dealings with Lemon Law repurchases for business clients. I do not know how the statute is worded. If you are seriously considering a Lemon Law pursuit, I would consult with your lawyer to determine how the statute reads. It may very well be that a Lemon Law claim voids the purchase contract. If that were the case, I would not take any depreciation on the vehicle, including amending a prior year's return to eliminate the deduction. But I would have to give this more thought than a simple five-minute typed reply in an area that I have not researched.
 

MelaniainLA

Member
Dec 22, 2016
886
1,226
Los Angeles, CA
A totaled vehicle would be considered a business casualty loss and the insurance proceeds would be deemed the sales price. It makes no difference whether you purchased the vehicle or financed it and the insurance proceeds were sent to the legal owner. And, remember it is depreciation allowed (i.e., actually deducted from your tax return) or allowable (i.e., you did not take a depreciation deduction but could have). So, you could easily have some recapture in this situation. Or you might have a 1231 loss if the adjusted basis > the insurance proceeds.

I have not had any personal dealings with Lemon Law repurchases for business clients. I do not know how the statute is worded. If you are seriously considering a Lemon Law pursuit, I would consult with your lawyer to determine how the statute reads. It may very well be that a Lemon Law claim voids the purchase contract. If that were the case, I would not take any depreciation on the vehicle, including amending a prior year's return to eliminate the deduction. But I would have to give this more thought than a simple five-minute typed reply in an area that I have not researched.

Thanks so much! @cpa The Lemon issues doesn't apply to me but rather to a friend who's a mostly Business-use Model X and it's being Lemon'ed after nearly a year of ownership. I warned him that he might face recapture rules because this could be considered a "sale" but he'll have to talk to his own legal/financial people.
 

fgwinn

New Member
Jan 10, 2018
4
4
Philadelphia
You can probably avoid the recapture by trading in the vehicle against a like asset rather than doing an outright sale. Trade-ins also reduce the Sales Tax on the new vehicle in most States. In some States, like PA, you get the reduction in Sales Tax even if the new vehicle is pre-owned. I think the new vehicle will have to be more expensive than the trade-in value in order to avoid the recapture.

So, i've think i understand the depreciating portion of purchasing a model X for business use.

Can someone explain the recapture portion if i were to sell the X at some point before 6 years?
 

cpa

Active Member
May 17, 2014
3,107
3,982
Central Valley
You can probably avoid the recapture by trading in the vehicle against a like asset rather than doing an outright sale. Trade-ins also reduce the Sales Tax on the new vehicle in most States. In some States, like PA, you get the reduction in Sales Tax even if the new vehicle is pre-owned. I think the new vehicle will have to be more expensive than the trade-in value in order to avoid the recapture.

I would not hang my hat on trading in vehicles to avoid recapture of depreciation. The New! and Improved! Tax Law specifically eliminated like-kind exchanges for personal property. Apologies for getting technical, but this is an important income tax concept:

In taxation when an asset is sold or disposed of at a gain, this is considered a "realized" gain. However, this gain may not necessarily be "recognized" on one's tax return. Under the old rules, a vehicle trade-in would qualify under the like-kind exchange deferral rules, so the realized gain would not be recognized. Any realized gain so deferred on the trade-in would be used to reduce the basis in the new vehicle acquired. The statute and regulations for section 1031 are written using these terms.

Since these rules have been repealed, I would expect that any automobile trade-in would result in depreciation recapture.
 
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fgwinn

New Member
Jan 10, 2018
4
4
Philadelphia
I suspect a lot of people will be surprised by these new rules.

I would not hang my hat on trading in vehicles to avoid recapture of depreciation. The New! and Improved! Tax Law specifically eliminated like-kind exchanges for personal property. Apologies for getting technical, but this is an important income tax concept:

In taxation when an asset is sold or disposed of at a gain, this is considered a "realized" gain. However, this gain may not necessarily be "recognized" on one's tax return. Under the old rules, a vehicle trade-in would qualify under the like-kind exchange deferral rules, so the realized gain would not be recognized. Any realized gain so deferred on the trade-in would be used to reduce the basis in the new vehicle acquired. The statute and regulations for section 1031 are written using these terms.

Since these rules have been repealed, I would expect that any automobile trade-in would result in depreciation recapture.
 
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5States

Member
Mar 25, 2018
8
0
San Francisco Bay Area
Can someone provide a summary of steps to properly execute this? Something like:

1. Purchase/finance MX personally
2. Lease MX to Business
3. Use/track >50% usage for business.

Or for the 100% deduction does it have to be:

1. Business finances Model X (how is this done? With Tesla Financing or 3rd party?)
2. Place MX title in Business name
3. Use/track >50% usage for business.

Or if no business financing exists:

1. Business pays for ENTIRE purchase of MX
2. Place MX title in Business name
3. Use/track >50% usage for business.
 

cpa

Active Member
May 17, 2014
3,107
3,982
Central Valley
Not trying to be smart, 5States.

Seriously, seek professional guidance. It will be well worth the meeting and the fee that the professional will charge you. Face-to-face meetings with note taking provides a much higher level of understanding than answers on a public forum, particularly since many relevant facts are omitted from your brief synopsis.

The professional can ask relevant questions and provide answers that can give you a better understanding of your options and how you wish to pursue your structuring.
 
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